Portugal’s Main Energy Producer that Everyone Loved to Hate Authors: João Carlos Marques Silva, Ph.D. and José Azevedo Pereira, Ph.D. Index Synopsis .................................................................................................................................................. 1 The Early Years ........................................................................................................................................ 2 The Initial Energy Subsidies .................................................................................................................... 2 Liberalization of the Market ................................................................................................................... 3 The Subsidies from 2007 onward ........................................................................................................... 3 CMECs under Scrutiny – the ERSE Study ............................................................................................. 3 CIEG - The Biggest Subsidy that Includes the CMECs .......................................................................... 5 CIEG – Additional (hard to explain) Costs ........................................................................................... 7 CMEC Compensation Scheme and Supervision .................................................................................. 7 Latest Significant Developments (2014-2017) ........................................................................................ 8 Extraordinary Contribution on Energy ................................................................................................ 8 Mexia’s Position in EDP to be Terminated? ........................................................................................ 9 Smaller Competitors Facing Difficulties .............................................................................................. 9 Special Tax on Renewable Energy - Cracks on the Government Coalition for State Budget 2018 ..... 9 EDP’s Response to Negative Public Awareness ................................................................................ 11 Portugal’s Credit Rating .................................................................................................................... 13 EDP’s Shareholders & Mindmap ........................................................................................................... 13 Concluding Remarks.............................................................................................................................. 15 Annex A – International Growth of EDP .................................................................................................. i Annex B - Financial Data and KPIs ........................................................................................................... ii EDP’s Financial Statements ................................................................................................................. ii EDP’s Financial KPIs ............................................................................................................................ vi EDP’s Share Value Over Time ........................................................................................................... viii Market Discount Rates in 2007 .......................................................................................................... ix Discount Rates for Electricity Utilities ............................................................................................ ix Annex C – China Three Gorges Corporation ........................................................................................... x Company Profile .................................................................................................................................. x Purchase of EDP .................................................................................................................................. x Annex D – Portugal / China Relationships in 2017................................................................................ xii Annex E – CIEG Components Explained ............................................................................................... xiii Annex F – Guiding Case Questions ....................................................................................................... xv Annex G - About the authors ................................................................................................................xvi References ........................................................................................................................................... xvii Portugal’s Main Energy Producer that Everyone Loved to Hate Synopsis This business case portrays the problems that an energy producing company faced in Portugal, in its transition from being a public company to becoming privatized. The Portuguese Government issued EDP with generous subsidies to guarantee its future profits and privatization success, but a few years later, after EDP was fully privatized, there was great political pressure to downsize such subsidies. The case describes the main steps taken by EDP from its creation and privatization, culminating at the end of 2017, where it was heavily criticized by media and political parties due to high value of subsidies that had been granted to the company by the Portuguese Government in the past, while it was still a public company, and the renegotiation of those same subsidies after it had been privatized. EDP’s president António Mexia was under police investigation due to having led the renegotiation talks in 2007, and it was feared that EDP’s investors could refrain from investing in the company. Should EDP campaign to clear its good name, or would it be better to let the matter fall with the passing of time? Could the share value be affected? Should EDP prepare itself for loss of revenue due to an eventual downsizing of the subsidies? Keywords: energy sector, subsidies, privatization 1/15 The Early Years EDP was created in 1976, after the merger of 13 companies that had been nationalized the previous year, becoming Portugal’s (only) electricity provider. The name stood for “Electricidade de Portugal” (Electricity of Portugal). As a state company, it was responsible for providing electricity for the whole country, the modernization and extension of the power distribution lines, planning and construction of the national electricity-producing park, and of designing a unique tariff for all its clients. In the mid 1980’s, EDP’s power distribution covered 97% of continental Portugal and assured 80% of the country with low voltage electricity. In 1991, the Portuguese Government decided to change EDP’s juridical stature from a private company to an Anonymous Society (Sociedade Anónima – SA). In 1994, after a profound restructuring (from which REN (Redes Energéticas Nacionais1) emerged), the EDP group was created. The Initial Energy Subsidies In 1995, the CAE (Contratos de Aquisição de Energia / Power Purchase Agreements) were celebrated between the Portuguese Government (via RNT – Rede Nacional de Transporte / Nacional Transport Network) and all power producers, in order to guarantee controlled energy prices for Portugal and prepare EDP’s privatization, guaranteeing most of the company’s future profits. The long term CAEs (about 30 years) would guarantee that EDP’s power plants would sell the totality of their produced electricity at fixed prices (according to technical and commercial conditions defined in the contract) to the concession entity of RNT, therefore guaranteeing future cash flows without any market risk. Tariffs to the public service system’s (SEP – Sistema Eléctrico de Serviço Público) end customers (and also for the transmission and distribution parts) were regulated by ERSE (Entidade Reguladora dos Serviços Energéticos), the Portuguese Electricity Regulatory Agency. In June 1997, EDP enters its first privatization phase, selling off 30% of its capital. It was an operation of great success, in which demand was 30x in excess of the supply, turning over 800 thousand Portuguese (about 8% of the population) into new EDP’s shareholders. Additional privatization phases occurred in May 1998, June 1998, October 2000, November 2004 and December 2005. In 2013, the Government’s last 4,144% of the capital was sold (at 2,35€/share), forfeiting the totality of public presence in EDP’s equity. In November 2000, REN left the EDP group, in compliance with the directive 96/92/CE of 19 December 1996, that imposed a legal separation between companies responsible for the management of the power distribution network and companies responsible for the production and distribution of electricity. In 2004, and in order to comply with the European Commission’s directive to promote free competition (directive 2003/54/CE) in the Iberian energy market (MIBEL), the CAE was to be abolished for the majority of the power providers. 1 Originally REN was dubbed as “Rede Eléctrica Nacional” (National Electric Grid), but later its name was changed to Redes Energéticas Nacionais (National Energy Grids). Nowadays (after 2006), we can say that REN operates the RNT (Rede Nacional de Transporte – Nacional Transport Network). 2/15 Meanwhile, it was in 2005 that António Mexia started his role as the president of EDP, replacing the former president João Talone. Before that, he had been a executive member in the Administration board of Banco